Is Cupertino sacrificing its core to Apple?

CUPERTINO, Calif. — Welcome to Appletown, USA.

Apple’s phenomenal success and expansion into buildings across this city over the last decade have already made it hard to know where Cupertino ends and the company begins. But just wait.

By the time Apple plops a campus the size of the Pentagon into this city of 60,000 people, Cupertino, Calif., will be more economically dependent on one company than any other Silicon Valley town.

Two years after the project was announced, as the details have come into sharper focus, it’s almost impossible to overestimate the effect Apple Campus 2 will have on Cupertino. Apple envisions the 176-acre campus as its own Fortress of Solitude that will cut off northeast Cupertino from the public.

This week, the city begins a series of hearings to grant final approval for the project. The hearings, and a development agreement under negotiation, represent the city’s best chance to set the terms of its relationship with the company for decades to come. Although Apple is eager to move forward on a project already behind schedule, the city must consider what concessions it wants before tying its economic fate so closely to a single company.

“In a high-tech area, even the most powerful companies disappear surprisingly quickly and employment can scale down much quicker than it scales up,” said Jerry Davis, a professor at University of Michigan’s Ross School of Business. “There is definitely risk.”

Big numbers

When the new campus is built — sometime in 2016 — Apple will cast a larger economic shadow over Cupertino than even Internet search giant Google does in nearby Mountain View.

The numbers contained in a recent economic impact report commissioned by Apple tell the story:

• Apple’s 16,000 employees in Cupertino make up 40% of the city’s jobs. When the new campus opens in 2016, Apple projects 24,000 Cupertino-based employees.

• Apple paid $9.2 million in tax revenue to the city in the last fiscal year, about 18% of the city’s budget. Apple predicts that will grow to $13 million.

• Apple currently accounts for 9.6% of Cupertino’s property tax valuation, up from 1.21% in 2001. The new campus will triple its valuation.

Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto, says there is little risk of Cupertino being too dependent on Apple. After all, this is Silicon Valley, where onetime giants fall and are replaced by hot young start-ups.

“I doubt that Apple will all of the sudden move their design headquarters to Nashville,” Levy said.

Still, the company seems more vulnerable than it did two years ago when the project was first proposed. Its stock has fallen about 30% in the last year as growth has slowed.

“Six months ago, I would have said if we were going to rely on one company, this would be the company to rely on,” said Cupertino Mayor Orrin Mahoney, a former Hewlett-Packard employee. “But things change fast in this business.”

Prestigious address

Apple co-founder Steve Jobs, who grew up in nearby Los Altos and went to high school in Cupertino, originally didn’t even want to put his company here.

In the 1970s, a feed and grain mill hinted at the town’s rural roots. Apricot orchards flowered alongside young computer companies.

Jobs yearned for the cachet of Stanford University, which helped give rise to HP. He rented a post office box in Palo Alto to lend Apple more prestige, recalled early Apple employee Daniel Kottke, and he scouted Los Altos for a headquarters with “a higher-class address.” Unable to find anything, Jobs settled on Cupertino.

After years of leasing office space, Apple completed a new headquarters at 1 Infinite Loop in 1993. By then, Cupertino was being transformed into the suburban model of strip malls, office parks and concrete that sprawl across Silicon Valley.

Over the last decade, Apple has outgrown its Infinite Loop address, which has 3,000 employees stuffed into 856,000 square feet. The company purchased or leased an additional 2 million square feet of space in the Cupertino area for 13,000 more employees, including 76 acres adjacent to the old HP campus.

Along the way, Apple put Cupertino on the map.

“We felt proud of ourselves getting some fame for our tiny part of the world,” Apple co-founder Steve Wozniak said. “Apple became hugely successful and so valuable, and we were the shining star of Cupertino.”

Beyond the glamour of being associated with Apple, Cupertino has reaped big economic benefits, such as the $4.6 billion that Apple says the company spends each year at local Silicon Valley businesses. There are smaller intangibles, such as Apple employees who volunteer in schools.

But it’s only in the last decade that Apple has become the city’s dominant economic force. That’s the result of Apple’s growth and a decision by HP, once the city’s largest employer, to abandon its Cupertino campus.

After the departure of HP, city officials believed it was essential that Cupertino attract a wider range of companies so it didn’t rely too heavily on one employer.

“The recessions and the departure of a major company, Hewlett-Packard, demonstrates the need for diversification of the city’s revenue base,” reads Cupertino’s 2011 Comprehensive Annual Financial Report.

That year, Jobs presented a plan to do the opposite.

Resisting change

Cupertino still suffers from the rap that it’s less a city than a crossroads, in part because it has no historic downtown to give it a firm identity.

Now, Apple’s campus may become the city’s defining landmark. After accumulating 76 acres in east Cupertino, Apple bought the adjacent 100 acres to the north from HP.

Apple’s decision to build a new headquarters here has been greeted mostly with hometown, boosterish pride among businesses and residents, though there are small but noticeable rumblings about increased traffic, restricted access to this corner of town and the company’s outsized influence.

The element generating the most heat, however, is Apple’s request to unite these two chunks of land.

Apple wants to buy and close the road between them, Pruneridge Avenue. That request has upset some residents because the tree-lined sidewalks around the old HP campus are a popular walkway.

“I hear Apple wants to convert Pruneridge Ave between Wolf and Tantau from public to private space?” wrote Kao Lee in an email to the city. “I and many other people use it as part of a jogging/walking loop around the old HP campus.”

Apple must tear down 26 existing buildings, totaling 2.65 million square feet of space, before beginning construction on what would eventually be replaced with the new 2.8-million-square-foot campus. When done, the new campus will accommodate as many as 14,200 employees, up from about 10,000 previously working on the old HP campus.

Although Apple needs the new campus for its ballooning workforce, its other official objective, according to planning documents, is to “Achieve the security and privacy required for the invention of new products by eliminating any public access through the site, and protecting the perimeters against trespassers.”

The public can drive around the road that circles Apple’s current headquarters, two miles to the west at 1 Infinite Loop, putting them within a few feet of Apple’s offices, sacred geek territory.

The new headquarters building will be set far off the road, just as HP’s old offices were. And Apple plans to increase the number of trees on the land 50%, making the offices even harder for prying eyes to spot.

How important is security on the new site? In one email exchange with city staff, an Apple executive haggled over the location of a single tree.

“Also, if we move the tree an additional 5 feet in, the tree becomes a security issue for us,” Apple executive Meg Thomas wrote. “People will be able to potentially climb the tree and hop the fence.”

Roger Martin has lived one block from the site in neighboring Sunnyvale for two decades. He’ll be able to see the new campus from his second-story bedroom.

“They keep talking about how beautiful the Apple campus is going to be, but I am not an Apple employee,” Martin said.

Martin remembers the noise and commotion caused when HP built some offices. He’s worried about a flood of new cars racing through his neighborhood.

Tax rebates

On Tuesday, Cupertino begins the final stages for approving the campus with a joint hearing between the City Council and the Planning Commission. Instead of at the town hall, the meeting is being held at a nearby community center to accommodate the large crowd expected.

The City Council is then expected to formally vote to approve the plan Oct. 15. As the city and Apple continue to negotiate terms of the development agreement, Cupertino must decide what changes and financial terms it wants to request.

For instance, Apple currently has a deal with Cupertino to get a refund of half the sales taxes the city receives from the company.

Last year, according to Apple’s report, the city received $12.69 million in sales tax generated by Apple. Cupertino refunded about $6.4 million to Apple.

Apple wants to renew the deal. The report projects annual taxes to the city would still grow by $4 million if the tax deal were in place.

But what if Apple fails to meet its growth projections?

In an email to city staff in December, Cupertino City Manager David Brandt discussed a minimum tax payment for Apple, in case growth projections don’t pan out.

Meanwhile, the campus planning process has strained Cupertino’s resources. At a community meeting this summer to discuss the environmental impact report, the city had 50 of 160 staff members on hand to handle the crowd and logistics.

Just reviewing the project has threatened to overwhelm the city’s planning department to such an extent that officials proposed creating an Apple Situation Room at City Hall for staff and documents.

The city asked whether Apple could lend them a laptop because the planning department had only one, which it shared among employees. The city’s planning director also inquired whether Apple would buy them a Smart board.

Timm Borden, Cupertino’s director of public works, wrote in an email to an Apple executive: “It is certainly not routine business, it is most of our business, and we want to be proud to facilitate this once-in-a-lifetime project and meet your permit processing needs.”

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